Is Indian Real Estate Industry in an Unpredictable Growth?

Many are of the view that Indian real estate industry is in an unpredictable growth. In fact, a little while ago the industry was in a slump due to the recession that has swept across the world.So far as the Indian property market is concerned,the slump was only a transient phenomenon. Now, the market is back in the saddle and the real estate scenario is agog with deals and talks.And the new climate augurs well for the prospective investors.Reportedly,in the preceding quarter the price of prime commercial property in the metros and main cities across India has registered on an average 10 percent increase which is by and large a welcome change after months of recessionary market.Alongside, residential property market in the lower and middle income level sector has shown a marked increase in demand.Investment analysts and industry veterans are savvy as to a sustainable growth in the market in the coming future.

In order to arrive at any conclusion as to whether the Indian real estate industry is in an unpredictable growth or not, we need to appreciate facts in a wider perspective. Arguably,there is an overall growth in the property sector across India. The contention is as to whether or not this growth is susceptible to the vicissitudes and vagaries of market conditions in an unpredictable way.While we consider the strengths of the real estate market, we have to take into account the emergence of India as a major consumer market in the world.Necessarily,of late there is higher concentration of multinational corporate operations in India than ever before.Inevitably,this acts as major catalyst for a higher demand for both commercial and residential properties in India now.

Whether the Indian real estate industry is in an unpredictable growth or not is a matter to be analyzed vis-à-vis the findings of industry experts and economic analysts.Industry veterans are sanguine to hold that the real estate Indian industry is poised for great strides in the coming future. Reportedly, the industry is undergoing a metamorphosis. Sector-specific and macro-economic factors are the contributory elements in this growth phase. Jones Lang LaSalle, the world-renowned real estate analyst categorically maintains: 'economic recovery during CY 2010-11 is likely to reinvigorate the interest of foreign investors in India's real estate market. We expect enhanced capital inflow in the real estate sector in the medium-to-long-term'. Further, the International Monetary Fund has reported that while the advanced economies of the world will register an average 3.8 percent retrogressive growth in the coming years, India and China will record an average growth of 5.4 per cent. This growth in the national income will directly sustain the growth in the real estate industry.

Indian Real estate Sector is growing up.

The outlook on Indian real estate sector may not be too bright at the moment, but that is not deterring mutual funds from investing in paper issued by property developers.

In addition to the old restructured papers of Gurgaon-based builder Unitech, debt schemes of fund houses like SBI, ICICI and UTI have invested in papers of companies like K Raheja, Emmar MGF Land and Shapoorji Pallonji.

As per mutual fund tracker Value Research, UTI Bond (medium term) fund has invested Rs 14.7 crore in ‘BBB’-rated floating rate bonds of Emmar MGF Land. ICICI Prudential Liquid Fund has invested over Rs 421 crore in secured debentures of K Raheja Corporation. LIC Income Plus and SBI Short Horizon Debt Fund have invested Rs 1.8 crore and Rs 1.6 crore respectively, in the ‘A1’-rated commercial papers of Shapoorji Pallonji.

However, raters tracking debt are comfortable with the debt-equity mix of most real estate companies and are positive on the sector. “The fundamentals of India’s real estate sector are improving, as seen by better liquidity and improved demand in the residential segment,” said Rakesh Valecha, senior director, Fitch Ratings.

Enhanced affordability, lower mortgage rates and better job security have helped revive demand for homes, according to Mr Valecha. “Demand in the commercial segment remains weak, primarily due to over-supply and the scale-back of expansion plans by corporate India. But then, we expect demand for commercial spaces to improve in the second half of 2010,” he added.

According to analysts, in sharp contrast to 2007 and early 2008, real estate companies are not investing money to acquire mass land bank or other fixed assets. Post the turmoil in end-2008, real estate companies have realised the need for a stronger balance sheet. Many over-leveraged real estate firms have used their cash in books to de-leverage themselves.

Equity analysts tracking the sector are currently maintaining a neutral to near-positive outlook on the real estate sector. They expect prices to be stable in the medium term due to good demand. Property prices may only rise 3-5% over the next few months, say analysts.

Such a price trend could sustain the demand for real estate for a longer term. Moderate demand will enable real estate companies to complete existing projects and take up new ones. Pressure on profit margins, however, cannot be ruled out, analysts opine.

Overall, credit metrics are expected to recover in 2010 and 2011, as developers are expected to improve their capital structure, operating margins, and liquidity. According to sources, the restructured loans of Unitech are expected to come up for repayment (or reaching maturity) in about 6-8 months’ time. Unlike in 2008, fund managers and paper valuers are not expecting the company to have too many problems in repaying the debt.

Property prices in India rise by 17% in last one year:Makaan.com

The rise in national index is attributed to the hardening of property prices in the western markets of Mumbai and Pune, which rose by 29.4% and 28.1% respectively. Property investors and real estate industry players can take a sigh of relief; property prices in India have shown a reasonable uptrend in the last 12 months. As per the March 2010 release of Makaan.com Property Index (MPI), the national index stood at 1117 compared with 954 in the corresponding month last year, an increase of over 17%. The rise in national index is attributed to the hardening of property prices in the western markets of Mumbai and Pune, which rose by 29.4% and 28.1% respectively. Delhi rose by 6.8% in the same period. Putting pressure on the index were the property price movements in southern cities of Hyderabad, Bangalore and Chennai that corrected by 3.2%, 2.5% and 1.4% respectively over the last one year.  It is interesting to analyze the trends in property price movements. Prices fell in the first half (Jan-June period) of 2009 when the index dropped from 1000 to 946. This period was marked by complete lack of interest among investors & home buyers in making long term high value purchase decisions. With the Indian economy showing sign of revival and consumers becoming more confident about their future earnings, the property prices started rising in the second half (July-Dec period); with the index reaching 1128 in December 2009. The month of November and December saw two interesting trends. Firstly, developers in Mumbai, Delhi & Bangalore increased the prices of their existing projects. Secondly, new launches happened at prices significantly higher than the prevalent rates. This rise was too fast and too high and led to crowding out of home buyer as they caught off guard with this unexpected jump in rates. This led to lower transaction during the January to March 2010 period. The national price index moved in a narrow range from 1080 to 1117 during this period; beautifully capturing the mood of the market. Commenting on the findings Aditya Verma – VP & Business Head Makaan.com says, “Going forward, the signals from the economy are quite positive - the Budget for FY11 has been received positively, there is overall optimism in all sectors, job visibility is better among the salaried class. Realty sector is seeing the effects of this in the form of new launches across cities. For sustained development, it is critical to maintain property prices at the current level. Attempt to increase prices can lead to fall in demand.”

Property Investments in India: A Risk Analysis

Property investment is one of the most significant investments for all the investors who buy property with an intention to generate monetary returns. Investment in property is usually done by people to generate profit though renting it or for capital growth. Generally, investment in these properties is not done for residential purpose.

Benefits of property investments:

√ In a long term, the prices of the properties are bound to increase.
√ You can give the property on rent.
√ You can obtain tax variations and generate revenues.
√ You can receive tax deductions.

With the enormous benefits, there are a lot of risks associated with investing in these properties in India. Read ahead, to get a view of risks that can turn your property investment dream into a complete nightmare.

You are going to read about the risks associated with investment in property in India:

♦ The major risk associated with property investment is that you may loose your money that you invested. It is also called the capital risk.

♦ If the property in which you invested is in another currency, then the movement of the currency may affect the value of the property.

♦ You may have to sell the property on the same price on which you bought it.

♦ You may not find a tenant easily and you may have to fund the mortgage payment during these days.

♦ If you get a bad tenant then he can turn your head upside down. Damage to property, unpaid rents, anti social behavior, missing items, structural problems are the common problems that can be faced by the investor who has given his property on rent to a bad tenant.

These are the most common risks that an investor can face if he doesn’t invest in the right property or give the property on rent to a wrong tenant. Keep the above mentioned points in mind to invest rightly.

New Government Initiatives to Boost Real Estate Sector in India

At the Government turn most brand brand brand brand new process initiatives have been taken not long ago to progress the genuine estate zone in India. These process decisions will lend a impulse and procedure to the industry. It is over disbelief which the brand brand brand brand new initiatives will clear the intensity of the sector. Also, along with the impulse package voiced by the Government, the Reserve Bank of India (RBI) has taken a decisive step whereby banks have been authorised to digest brand brand brand brand new schemes profitable to the skill sector. As partial of the Government initiatives to progress genuine estate bang zone India, RBI has spoken concessional schemes for the genuine estate sector. Such initiatives include:• Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) repealed by increasingly incomparable series of states. • In box of integrated townships, the smallest area to be grown has been brought down to twenty-five acres from 100 acres. • 51 per cent FDI authorised in single-brand sell outlets and 100 per cent in cash-and-carry by the involuntary route. • Full repatriation of strange investment after 3 years. • Minimum collateral investment for wholly-owned subsidiaries and corner ventures stands at US$ 10 million and US$ 5 million, respectively. • 100 per cent FDI authorised in genuine estate projects by the involuntary route.Further, in the attempt to beginner brand brand brand brand new policies to progress the genuine estate zone in India, the Ministry of Commerce and Industry, Government of India, has taken stairs to revoke the time taken to rise special mercantile zones (SEZs) by simplifying the procedures to get the tax-tree industrial enclaves notified. Now developers can simply get their land personal as an SEZ at the opening itself by producing pretension deeds to infer their ownership. Again, the Government has voiced multiform concessions in the Budget 2008-2009. New Government initiatives to progress zone of Real Estate India embody extenuation a taxation legal holiday on increase from initiates in the monetary year 2007-2008. In sequence to suffer this benefit, the housing projects should be of the affordable housing section sort of 1000 to 1500 block feet. Another condition is which such projects should be finished by Mar 1, 2012. Further, the Finance Ministry has allocated US$ 207 million to accede to 1% seductiveness funding on home loans up to US$ 20, 691. In sequence to relief this benefit, the price of the home should not be on top of US$41, 382. It is believed which these initiatives will be supplement serve procedure to the genuine estate zone in the country.

Real Estate in India: Growing Towards New Heights

The factors such as booming economy, favourable demographics and liberalised foreign direct investment (FDI) regime, the Indian real estate sector has witnessed a revolution. The real estate in India is growing at 35 per cent. This sector is estimated to be worth US$ 15 billion and anticipated to grow at the rate of 30 per cent annually in the coming decade. India has become a new market for foreign investors due to its potential economical growth rate. As a matter of fact, this sector is attracting foreign investments worth US$ 30 billion in number of IT parks, hotels, medical, telecom and residential townships which are being constructed across India.

Real estate in India is the second largest employing sector including construction and facilities management. This sector is linked to about 250 supportive industries such as cement, brick, transport, steel, etc through backward and forward linkages. Accordingly, a unit increase in expenditure has a multiplier effect in this sector, as capacity to generate income is as high as five times.

Rising income levels of a growing middle class is the main reason for growth in the real estate. Apart from the income, other factors such as increase in nuclear families, low interest rates, modern attitudes to home ownership and a change of attitude amongst the young working population are responsible for real estate development. Therefore, it can be said that real estate property have changed the attitude from ’save and buy’ to ‘buy and repay’ to boost housing demand.

As per the information by ‘Housing Skyline of India 2007-08′, a research firm Indicus Analytics, it has predicted that there will be demand for over 24.3 million new dwellings for self-living in urban India by 2015. Moreover, rapid growth of the Indian economy has faced a cascading effect on demand for commercial property to meet the needs of business such as modern offices, warehouses, hotels and retail shopping centres.

With the significant investment opportunities emerging in this sector, international real estate players have entered in the country. Effective participation from large local and international industrialists have resulted in potential economical growth of India which is moving towards maturity. Currently, foreign direct investment or FDI inflow into this sector is estimated to be between US$ 5 – 5.50 billion. A unit of Deutsche Bank for instance, aims to invest more than US$ 1 billion over three years in Indian construction and real estate property projects. Russian conglomerate Sistema plans to develop hotel, offices and residential complexes in major cities of India with an initial investment of US$ 100-200 million.

The boom in this industry has attracted large number of realty funds to step into this market. Prominent global players such as Carlyle, Blackstone, Morgan Stanley, Trikona, Warbus Pincus, HSBC Financial Services, Americorp Ventures, Barclays and Citigroup among others have all already checked into the Indian realty market.

Among international players, the many Indian realtors are going global by making their name in the international market through significant investments in foreign markets. Prudential Real Estate Investors for instance, has acquired Round Hill Capital Partners Kabushiki Kaisha, a Japanese asset management firm. Embassy Group has settled a deal with the Serbian government to construct a US$ 600 million IT park in Serbia. Parsvnath Developers in collaboration with the Al-Hasan Group in Oman.

Importantly, government has introduced many innovative reform measures to discover the potential of the sector. 100 per cent FDI is allowed in realty projects through the automatic route, for instance. 51 per cent FDI permitted in single brand retail outlets and 100 per cent in cash and carry through the automatic route. With growing economy in India, the demand for all segments of the real estate sector are likely to continue.

Banks cut down on lending to real estate

Reserve Bank of India (RBI) data shows that banks are cutting down on loans to real estate and reducing exposure to credit card debt. Loans to real estate increased by a mere 0.9%, while credit card outstandings have fallen by 28.3% in the year to 26 February.

Real estate loans are loans to builders and are distinct from housing loans.

Between 20 November 2009 and 26 February, credit card outstandings went down from Rs22,635 crore to Rs20,737 crore. Outstandings on account of real estate loans, however, went up from Rs88,581 crore to Rs91,607 crore.

Growth in lending to real estate has been steadily declining, from 41.5% year-on-year (y-o-y) as on 28 August 2009 to 15.3% as on 20 November 2009, and now to 0.9%. This suggests that the widely expected higher capital requirements for lending to the realty sector by RBI may not be necessary. Housing loans, which are loans to individuals and distinct from loans to real estate, have gone up by a tepid 8.3% y-o-y, although the rate of growth has been steadily increasing. In November 2009, for instance, the rate of growth of housing loans was 7.3%.

Education loans have been the fastest-growing component of personal loans, rising 31.2% y-o-y.

In the services sector, bank lending to professionals showed the highest rate of growth, at 36.9% y-o-y. Banks continued to lend hand over fist to non-banking financial companies and these loans grew 25.8%.

Loans to infrastructure continued to grow strongly at 42.3% y-o-y, although the pace slowed from 47.2% y-o-y in November. Construction loan growth was meagre at 8.1%. Banks’ exposure to the petroleum, coal products and nuclear fuels sector continued to decline, albeit at a slower pace.

RBI move won't affect home loans

The real estate sector welcomed the credit policy announced by the Reserve Bank of India (RBI) on Tuesday.

The sector termed the central bank's move as balanced and said there will be no immediate effect on home loan rates.

"The RBI policy is balanced. It gives a strong message on inflation indicating a possible tightening of interest rates in the future. But it may allow infrastructure growth with measures on infrastructure bonds," Pradeep Jain, chairman, Parsvnath Developers, said.

"I don't foresee any increase in interest rates on home loans in the first quarter of the current fiscal as currently there is sufficient liquidity in the market. But definitely the banks will be raising the lending rates in the long run," he said.

"However, in the near-term, home buyers will not find interest rate as a stumbling block in their buying decisions. This is applicable to the housing loans as well, which is a relief measure for the realty sector," Jain added.

Another welcome step is a cut of five per cent in the substandard bank loan rates, which now stands at 15 per cent. This will help infrastructure companies to acquire more funds from banks, which will solve the longterm funding problems faced by the companies, he added The National Real Estate Development Council (NAREDCO) has also applauded the anti- inflationary stance of RBI in curbing prices of the major inputs in construction, steel and cement.

However, Rohtas Goel, president, NAREDCO, said, "At least the first-time home buyers should be covered under priority sector borrowing by RBI, with upper borrowing ceiling of Rs 30 lakh." According to Vidur Bharadwaj, director, The 3C Company, "The repo rate hike will turn funds costlier for banks, which might result in the increase in interest rates. But since home loan is an asset- based secured loan in a bank's portfolio, it may not see any immediate rise."

"The majority of home buyers choose a property based on their immediate requirements. So, a marginal rise in interest rate is not of much consequence to an end- user," he added.

The Bombay Stock Exchange (BSE) Realty Index advanced 3.08 per cent and BSE Bankex moved 1.53 per cent higher on Tuesday.

India back to business fairly soon

The global real estate recovery will be longer, slower and more muted in mature economies than it will be in India or China feels Mr Colin Dyer, Global CEO and President, Jones Lang LaSalle Inc. In an interview with Business Line, Mr Dyer discusses the structural changes in the real estate sector as a result of the recession and about the short-lived opportunity to buy at lucrative prices.

Excerpts from the interview:

Avoid realty at this point of time: Elara Capital

With interest rates hardening, the funds flowing into the real estate space could become a problem, real estate IPOs have also not been getting too much of attraction. Do you think this is something that will not reflect in the stock prices? 

30% Rise in Mumbai Home Sales

Mumbai home prices have jumped about 30 percent over the past six months, leading to a drop in home sales in India’s financial capital as higher prices deter buyers, Knight Frank LLP said. “Residential property prices have risen too much too fast,” Pranay Vakil, chairman of Knight Frank (India) Pvt. said in an interview in Mumbai. “We are seeing resistance at higher prices and as a result volumes have declined.” The average sale price of existing homes between 1,000 square feet (93 square meters) and 2,000 square feet has climbed 11 percent to 20,000 ($450) a square foot in North Mumbai in the fourth quarter from the three months to Sept. 30, according to data from property consultant Cushman & Wakefield. That was the highest in at least eight quarters.

Banks likely to raise realty loan rates on real estate projects

The Reserve Bank of India (RBI) may make borrowing more expensive for builders by asking banks to set aside more capital for loans to commercial real estate projects. A higher capital requirement will force banks to raise interest rate on such loans.